In the debate on health care both sides quote Congressional Budget Office (CBO) estimates to support their positions.  Proponents position CBO as a “neutral referee”, while detractors question the assumptions CBO uses to score the proposals.  It would be a mistake to confuse “neutral” with “accurate”, but too convenient to dismiss projections without understanding the tolerances that bound the estimates.

The current health care bill that is positioned for a vote in the House of Representatives, the Patient Protection and Affordable Care Act, H.R. 3590 (PPACA), passed by the Senate 60-39 on Christmas Eve, was “scored” by CBO¹ to “yield a net reduction in federal deficits of $130 billion over the 2010-2019 period”.  This is a niggardly, insignificant 1.3% of the total deficits projected for President Obama’s budgets over the same year period, $10 trillion.

Looking deeper into the CBO analysis, we find:

1) CBO estimates deficits will increase under PPACA after the sixth year, thus claims of favorable effects on the deficit are temporary.

2) 76% of the increased revenue contributing to the reduction in deficits comes from taxes, fees, and penalties that are ultimately paid by the consumer, thus supporting the contention that this is partly a tax bill in disguise.

3) Gross incremental costs are projected at almost $1 trillion.  Costs can usually be estimated with greater precision than can offsetting revenues and cost savings, as the CBO admits: “The range of uncertainty surrounding that assessment [of the net effect] is quite wide …”

4)  The much touted savings in Medicare comprises reduction in payment for most services and hospitalization, and “setting payment rates in the Medicare Advantage program [private Medicare plans]”.  These speculative “savings” require more government activity in the market to reap a fuzzy $438 billion over ten years.  As William F. Buckley, Jr. said, “When you raise taxes, you raise taxes.  When you forecast spending decreases, you are engaged in necromancy.”

5) Member of Congress apparently insisted the CBO project beyond 10 years, over the CBO’s resistance.  Hedging their estimates, the CBO “expects” there might a small reduction in the deficit after 2019, but “The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it,” and “These longer-term calculations assume that the provisions are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation.”

What is not uncertain is that we won’t hear anyone from Congress or The White House quoting that line.

When asked to forecast the quantitative effects of economic policy, the best answer is to cite one’s right to remain silent.  Not afforded protection under the Fifth Amendment, CBO is required by law to evaluate every bill, while obliged by the principles of science to inform their readers of uncertainties in their work.  In a 2007 study², they analyzed sources of deviation and error in their budget projections and demonstrated that total surplus or deficit might, with a probability of 90%, deviate by -4% to +4 % of gross domestic product four years after the budget year for which the initial estimate is made.  For our current GDP of $14.4 trillion, this is a range of ± $580 billion.  And CBO puts this disclaimer in the 2008-2018 Budget and Economic Outlook³: “Actual budgetary outcomes are almost certain to differ from CBO’s baseline projections because of future legislative actions, unanticipated changes in conditions affecting the economy, and many other factors that affect federal spending and revenues.”  Uncertainty grows proportionally with time, so any projection beyond five years—upon which politicians are prone to rely—must be tempered with skepticism.

With such uncertainty in mind, it is still instructive to uncover the bottom line of these analyses.  In a letter to Senator Jeff Sessions in January⁴, CBO concludes “… enacting PPACA … would … increase gross federal debt”, which now stands at $12.5 trillion—a full 87% of GDP.  That is the kind of number that would make Greece envious.

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[1] Letter to Senator Harry Reid, Congressional Budget Office, 19 December 2009, http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf

[2] “The Uncertainty of Budget Projections: A Discussion of Data and Methods.” Congressional Budget Office, April 2003, http://www.cbo.gov/ftpdocs/78xx/doc7837/03-05-Uncertain.pdf

[3] The Budget and Economic Outlook: Fiscal Years 2008 to 2018, Congressional Budget Office, January 2008, http://www.cbo.gov/ftpdocs/89xx/doc8917/01-23-2008_BudgetOutlook.pdf

[4] Letter to Senator Jeff Sessions, Congressional Budget Office, 22 January 2010,  http://www.cbo.gov/ftpdocs/110xx/doc11005/01-22-HI_Fund.pdf